Very Short Question Answer of Market Equilibrium and Efficiency
Define demand.
Demand is defined as the desire for a commodity with ability and willingness to a pay. In other words, it is also defined as the quantity of a commodity which a consumer buys in a market at the given price and time period.
List out any five determinants of demand.
Any five determinants of demand are as follows:
- Price of commodity
- Income of the consumer
- Price of related goods
- Size and composition of population
- Expectation of the consumer
Define the substitute goods.
Substitute goods are those goods, which can be used in absence of other goods. For example, tea and coffee, ink pen and ball pen, etc. are the substitute goods.
Define the complementary goods.
Complementary goods are those goods, which are jointly used to satisfy a particular want. For example, ink pen and ink, pen and copy, etc. are the complementary goods.
Give any one difference between normal and inferior goods.
Normal good is that for which demand increases with increase in income and vice-versa where as inferior goods is that for which demand increases with decrease in income and vice-versa.
Short Question Answer of Market Equilibrium
What are the determinants of demand? Explain.
Or, Explain the major factors which influence demand for a commodity.
Demand for a commodity depends upon many factors. Factors determining demand for a commodity are known as determinants of demand. The most important determinants of demand are as follows:
i. Price of the commodity: The most important determinant of demand is the price of the same commodity: When price of a commodity falls, its quantity demanded will increase and vice-versa. It means that there is inverse relationship between the price and quantity demand for the commodity.
ii. Income of the consumer: Demand for a commodity changes when income of the consumer changes. In case of normal goods when the income of the consumer rises, the demand also increases and vice versa. But, in case of inferior goods, the demand for the commodity decreases with the rise in income and vice-versa.
iii. Price of the related goods: When the price of related goods changes, the demand for related goods also change. There are two types of related goods:
a. Substitute goods: Those goods are substitute goods, which can be used in the absence of other goods. In case of substitute goods, if the price of one good rises, the demand for other goods also rises and vice-versa. For example, tea and coffee are substitute goods. If price of tea increases, assuming price of coffee as constant, the demand for coffee will increase.
b. Complementary goods: Those goods are complementary goods, which are jointly used to satisfy a particular want. In case of complementary goods, if there is rise in price of one good, assuming price of related good constant, the demand for other good will fall and vice-versa. For example, pen and ink, if price of pen rises, assuming price of ink as constant, the demand for ink will decrease.
iv. Tastes and preferences of the consumer: Demand also depends on the taste and preference of the consumer. The change in consumer’s taste and preference causes the change in demand for goods. If the taste and preference for a commodity is in favor of consumer, the demand of that commodity will increase and vice-versa.
v. Advertisement: There is a great importance of advertisement. Goods, which are widely advertised, become popular and consumers are attracted towards those goods. People can also take more information about various goods from the advertisement. As a result, the demand for those goods increase.
vi. Size and composition of population: The size of population also affects the demand for goods and services. When the size of population increases, the demand for necessaries of life also increase and vice versa. Composition of population means the proportion of young, and old and children as well as the ratio of men to women. The composition of population also affects the composition of demand. For example, if population of elderly people increases, demand for medicine will increase.
vii. Consumer’s expectation: If a consumer expects a rise in the price of a commodity in the near future, he will demand more quantities of that commodity at present time so that he should not have to pay higher price in the future. Similarly, if the consumer expects he will have good income in the future, he will spend greater part of his income at present time. As a result, his present demand for good will increase.
viii. Climate and weather: The demand for goods is also affected by the climate and weather. In winter season, the demand for warm clothes, hot drinks, heaters etc. increase. On the other hand, demand for cold drinks, ice-cream, woolen clothes etc. increase in the summer season.
Explain the factors causing a shift in the demand curve.
Factors Causing the Shift in Demand Curve:
The law of demand states the inverse relationship between price and the quantity demanded, other things remaining the same. When there is change in factors other than price, the whole demand curve shifts. In other words, factors other than price determine the position and level of the demand curve. As a result of the change in these factors, the demand curve shifts rightward or leftward. The following are the factors, which cause demand curve to shift:
i. Income of the consumer: Demand for a commodity changes when income changes. The change in demand depends on the nature of the commodity. In the case of normal goods, when the income of the consumer rises, the demand also increases. As a result, the whole demand curve shifts rightward: But in the case of inferior goods, demand decreases with the rise in income and vice versa. It means that there exists inverse relationship between income and quantity demanded in case of inferior goods and vice-versa.
ii. Price of the related goods: When the prices of the related goods change, the to Microeconomics for Business whole demand curve will shift. It shifts leftward or rightward according to the types of related goods. There are two types of related goods:
a. Substitute goods: Two goods are said to be substitute goods, if the price one good rises, the demand for other good also rises and vice versa. For example tea and coffee are suitable goods. If price of tea increases, the demand for coffee will increase and vice-versa. It means that if price of substitute goods increase, the demand curve for the commodity will shift rightward and vice-versa.
b. Complementary goods: Two goods are said to be complementary, if rise in price of one good decrease the demand for another good and vice versa. In other words, complementary goods are those, which are jointly used to satisfy a want. For example, pen and ink are complementary goods. If price of pen decreases, the demand for ink will increase and vice-versa. It means that if price of complementary goods increase, the demand curves for the commodity will shift leftward and vice-versa.
iii. Tastes and preferences of the consumer: Demand also depends on the tastes and preferences of the consumer. The change in consumer’s tastes and preferences causes them change in demand for goods. If quantity demanded increases due to change in taste and preferences, the demand curve will shift to the rightward and vice-versa.
iv. Advertisement: There is great importance of advertisement. Goods, which are widely advertised, become popular. People can get information about various goods from advertisement. Consequently, they demand more quantities. As a result, the demand curve will shift rightward. On the other hand if advertisement expenditure decreases, demand will decrease. Consequently, the demand will shift leftward.
v. Population and its composition: Increase in population, increases demand for necessaries of life. The composition of population also affects demand Composition of population means the proportion of young, old and children as well as the ratio of men to women. A change in composition of population has an effect on demand for different commodities.
vi. The availability of credit: Nowadays the demand for many durable consumer goods like car, furniture, television, and other types of household equipment depends very much on provision of credit facilities. Such credit facilities are provided by banking sector on monthly installment basis. If there is any change in terms this type of finance, there will be marked effect on demand for such types of goods.
vii. Expectation: If a consumer expects that in the near future, the price of the goods rises, then at the present time he demands greater quantities of the goods so that in the future he should not have to pay higher price and vice versa. Similarly, when a consumer hopes that in the future he will have good income, then at the present he will spend greater part of his income. As a result, his present demand for good will increase. The expectation of future shortage for a commodity also increases demand for it even at the same or higher price.
Describe the determinants of supply. Or, What are the factors determining supply of a commodity? Explain.
Supply of a commodity depends upon many factors. Factors determining supply of a commodity are known as determinants of supply. The most important determinants of supply are as follows:
i. Price of the commodity: The price of the commodity is most important determinant of supply. There is direct relationship between price of the commodity and its quantity supplied, other things remaining the same. It means that at the higher price, producers or sellers offer more quantity of a commodity for sale and at a lower price, producers or sellers offer less quantity. of the commodity for sale.
ii. The price of the other goods: The supply of a particular commodity is inversely related with the price of other commodities. For example, a rise in the price of rice will fall the supply of wheat. This is due to the fact that rise in the price of rice will encourage producers to produce more rice.
iii. The price of the factors of production: Supply of commodity is also affected by the price of factors of production. With the rise in the price of factors of production, the cost of production also rises, which results decrease supply and vice versa.
iv. Goal of the firm: If the goal of the firm is to maximize profit, less quantity of the commodity will be offered for sale at high price. On the other hand, if the goal of the firm is to maximize sales or revenue or maximize output or employment, more will be supplied even at the lower price.
v. Improvement in technology: Improvement in technology has positive effect on supply of the commodity. It reduces per unit cost of production. Consequently, profit of the business firm will increase. In order to earn more profit, firms increases supply of the commodity.
vi. Government policy: Taxation and subsidy policies of the government also affect market supply of the commodity. Increase in taxation tends to reduce the supply, while subsides tends to induce greater supply of the commodity.
vii. Expected future price: If the producers expect rise in price of the commodity in the near future, current supply of the commodity decreases. On the other hand, if they expect fall in the price, current supply increases.
viii. Number of firms: Market supply of a commodity also depends upon number of firms in the market. Increase in the number of firms implies increase in market supply. Decrease in the number of firms implies decrease in market supply of a commodity.
ix. Development of infrastructure: The supply of the commodity depends on available facilities of infrastructure such as transport and communication, electricity, etc. Producer can supply more quantity of the product with the proper development of such infrastructures and vice-versa.
x. Natural factors: Favorable natural factors such as adequate rainfall help to boost up agricultural production, which leads to increase in supply. On the other hand, unfavorable natural factors like drought, heavy rainfall, storm, flood etc. hinder production of agricultural production, which leads to decrease in supply.
Explain the factors causing shift in supply curve.
The factors causing shift in supply curve are as follows:
i. Change in price of the others goods: The supply of a particular commodity is influenced by the price of other commodities. For example, a rise in the price of rice will fall the supply of wheat. This is due to the fact that rise in the price of rice will encourage producers to produce more rice. Consequently, production of wheat will be lower, which results decrease in supply of wheat. Consequently supply curve of wheat shifts towards left and vice-versa.
ii. Change in price of the factors of production: Supply of commodity is also affected by the price of factors of production. With the rise in the price of factors in production, the cost of production also rises, which results decrease of supply and vice versa.
iii. Change in goal of the firm: If the goal of the firm is to maximize profit, less quantity of the commodity will be offered for sale at high price. On the other hand, if the goal of the firm is to maximize sales or maximize output or employment, more quantities will be offered in sale even at a lower price.
iv. Change in technology: Change in technology also affects supply of the commodity. Improvement in the technique of production reduces cost of production, which leads to increase in supply.
v. Change in government policy: Taxation and subsidy policies of the government also affect market supply of the commodity. Increase in taxation tends to reduce the supply, while subsides tends to induce greater supply of the commodity.
vi. Expected future price: If the producer expects the price of the commodity to rise in the near future, current supply of the commodity decreases. On the other hand, if he expects fall in the price, current supply increases.
vii. Change in number of firms: Market supply of a commodity also depends upon number of firms in the market. Increase in the number of firms implies increase in market supply. Decrease in the number of firms implies decrease in market supply of a commodity.
Long Question Answer of Market Equilibrium
Define demand. Explain the factors causing shift in demand curve.
Demand is defined as the desire for a commodity with ability and willingness to a pay. In other words, it is also defined as the quantity of a commodity which a consumer buys in a market at the given price and time period.
Factors Causing the Shift in Demand Curve:
The law of demand states the inverse relationship between price and the quantity demanded, other things remaining the same. When there is change in factors other than price, the whole demand curve shifts. In other words, factors other than price determine the position and level of the demand curve. As a result of the change in these factors, the demand curve shifts rightward or leftward. The following are the factors, which cause demand curve to shift:
i. Income of the consumer: Demand for a commodity changes when income changes. The change in demand depends on the nature of the commodity. In the case of normal goods, when the income of the consumer rises, the demand also increases. As a result, the whole demand curve shifts rightward: But in the case of inferior goods, demand decreases with the rise in income and vice versa. It means that there exists inverse relationship between income and quantity demanded in case of inferior goods and vice-versa.
ii. Price of the related goods: When the prices of the related goods change, the to Microeconomics for Business whole demand curve will shift. It shifts leftward or rightward according to the types of related goods. There are two types of related goods:
a. Substitute goods: Two goods are said to be substitute goods, if the price one good rises, the demand for other good also rises and vice versa. For example tea and coffee are suitable goods. If price of tea increases, the demand for coffee will increase and vice-versa. It means that if price of substitute goods increase, the demand curve for the commodity will shift rightward and vice-versa.
b. Complementary goods: Two goods are said to be complementary, if rise in price of one good decrease the demand for another good and vice versa. In other words, complementary goods are those, which are jointly used to satisfy a want. For example, pen and ink are complementary goods. If price of pen decreases, the demand for ink will increase and vice-versa. It means that if price of complementary goods increase, the demand curves for the commodity will shift leftward and vice-versa.
iii. Tastes and preferences of the consumer: Demand also depends on the tastes and preferences of the consumer. The change in consumer’s tastes and preferences causes them change in demand for goods. If quantity demanded increases due to change in taste and preferences, the demand curve will shift to the rightward and vice-versa.
iv. Advertisement: There is great importance of advertisement. Goods, which are widely advertised, become popular. People can get information about various goods from advertisement. Consequently, they demand more quantities. As a result, the demand curve will shift rightward. On the other hand if advertisement expenditure decreases, demand will decrease. Consequently, the demand will shift leftward.
v. Population and its composition: Increase in population, increases demand for necessaries of life. The composition of population also affects demand Composition of population means the proportion of young, old and children as well as the ratio of men to women. A change in composition of population has an effect on demand for different commodities.
vi. The availability of credit: Nowadays the demand for many durable consumer goods like car, furniture, television, and other types of household equipment depends very much on provision of credit facilities. Such credit facilities are provided by banking sector on monthly installment basis. If there is any change in terms this type of finance, there will be marked effect on demand for such types of goods.
vii. Expectation: If a consumer expects that in the near future, the price of the goods rises, then at the present time he demands greater quantities of the goods so that in the future he should not have to pay higher price and vice versa. Similarly, when a consumer hopes that in the future he will have good income, then at the present he will spend greater part of his income. As a result, his present demand for good will increase. The expectation of future shortage for a commodity also increases demand for it even at the same or higher price.
Explain the concept of demand function. What are the determinants of demand? Explain.
Demand function is defined as the functional relationship between demand for a commodity and its various determinants. The various determinants of demand are price of the commodity, price of related commodities, income of consumer, advertisement expenditure, taste and preference of the consumer, composition and size of the population, etc. Demand function can be expressed as:
Dx = f (Px, PY, Y, T, P, A, …)
where,
Dx= Demand for good-X
Py = Price for good-Y
T = Taste and preference
Px = Price for good-X
Y = Income of the consumer
A = Advertisement
P = Composition and size of the population
But for the sake of simplicity, we assume that factors other than price of the commodity remain constant. On the basis of this assumptions, we can express demand function as follows:
Dx = f (Px)
Determinants of Demand:
Demand for a commodity depends upon many factors. Factors determining demand for a commodity are known as determinants of demand. The most important determinants of demand are as follows:
i. Price of the commodity: The most important determinant of demand is the price of the same commodity. When price of a commodity falls, its quantity demanded will increase and vice-versa. It means that there is inverse relationship between the price and quantity demand for the commodity.
ii. Income of the consumer: Demand for a commodity changes when income of the consumer changes. In case of normal goods when the income of the consumer rises, the demand also increases and vice versa. But, in case of inferior goods, the demand for the commodity decreases with the rise in income and vice-versa.
iii. Price of the related goods: When the price of related goods changes, the demand for related goods also change. There are two types of related goods:
a. Substitute goods: Those goods are substitute goods, which can be used in the absence of other goods. In case of substitute goods, if the price of one good rises, the demand for other goods also rises and vice-versa. For example, tea and coffee are substitute goods. If price of tea increases, assuming price of coffee as constant, the demand for coffee will increase.
b. Complementary goods: Those goods are complementary goods, which are jointly used to satisfy a particular want. In case of complementary goods, if there is rise in price of one good, assuming price of related good constant, the demand for other good will fall and vice-versa. For example, pen and ink, if price of pen rises, assuming price of ink as constant, the demand for ink will decrease.
iv. Tastes and preferences of the consumer: Demand also depends on the taste and preference of the consumer. The change in consumer’s taste and preference causes the change in demand for goods. If the taste and preference for a commodity is in favor of consumer, the demand of that commodity will increase and vice-versa.
v. Advertisement: There is a great importance of advertisement. Goods, which are widely advertised, become popular and consumers are attracted towards those goods. People can also take more information about various goods from the advertisement. As a result, the demand for those goods increase.
vi. Size and composition of population: The size of population also affects the demand for goods and services. When the size of population increases, the demand for necessaries of life also increase and vice versa. Composition of population means the proportion of young, and old and children as well as the ratio of men to women. The composition of population also affects the composition of demand. For example, if population of elderly people increases, demand for medicine will increase.
vii. Consumer’s expectation: If a consumer expects a rise in the price of a commodity in the near future, he will demand more quantities of that commodity at present time so that he should not have to pay higher price in the future. Similarly, if the consumer expects he will have good income in the future, he will spend greater part of his income at present time. As a result, his present demand for good will increase.
viii. Climate and weather: The demand for goods is also affected by the climate and weather. In winter season, the demand for warm clothes, hot drinks, heaters etc. increase. On the other hand, demand for cold drinks, ice-cream, woolen clothes etc. increase in the summer season.
Also Read: Introductory Macroeconomics | BBM | Question Bank
Explain the factors causing shift in demand curve and supply curve.
Factors Causing the Shift in Demand Curve:
The law of demand states the inverse relationship between price and the quantity demanded, other things remaining the same. When there is change in factors other than price, the whole demand curve shifts. In other words, factors other than price determine the position and level of the demand curve. As a result of the change in these factors, the demand curve shifts rightward or leftward. The following are the factors, which cause demand curve to shift:
i. Income of the consumer: Demand for a commodity changes when income changes. The change in demand depends on the nature of the commodity. In the case of normal goods, when the income of the consumer rises, the demand also increases. As a result, the whole demand curve shifts rightward: But in the case of inferior goods, demand decreases with the rise in income and vice versa. It means that there exists inverse relationship between income and quantity demanded in case of inferior goods and vice-versa.
ii. Price of the related goods: When the prices of the related goods change, the to Microeconomics for Business whole demand curve will shift. It shifts leftward or rightward according to the types of related goods. There are two types of related goods:
a. Substitute goods: Two goods are said to be substitute goods, if the price one good rises, the demand for other good also rises and vice versa. For example tea and coffee are suitable goods. If price of tea increases, the demand for coffee will increase and vice-versa. It means that if price of substitute goods increase, the demand curve for the commodity will shift rightward and vice-versa.
b. Complementary goods: Two goods are said to be complementary, if rise in price of one good decrease the demand for another good and vice versa. In other words, complementary goods are those, which are jointly used to satisfy a want. For example, pen and ink are complementary goods. If price of pen decreases, the demand for ink will increase and vice-versa. It means that if price of complementary goods increase, the demand curves for the commodity will shift leftward and vice-versa.
iii. Tastes and preferences of the consumer: Demand also depends on the tastes and preferences of the consumer. The change in consumer’s tastes and preferences causes them change in demand for goods. If quantity demanded increases due to change in taste and preferences, the demand curve will shift to the rightward and vice-versa.
iv. Advertisement: There is great importance of advertisement. Goods, which are widely advertised, become popular. People can get information about various goods from advertisement. Consequently, they demand more quantities. As a result, the demand curve will shift rightward. On the other hand if advertisement expenditure decreases, demand will decrease. Consequently, the demand will shift leftward.
v. Population and its composition: Increase in population, increases demand for necessaries of life. The composition of population also affects demand Composition of population means the proportion of young, old and children as well as the ratio of men to women. A change in composition of population has an effect on demand for different commodities.
vi. The availability of credit: Nowadays the demand for many durable consumer goods like car, furniture, television, and other types of household equipment depends very much on provision of credit facilities. Such credit facilities are provided by banking sector on monthly installment basis. If there is any change in terms this type of finance, there will be marked effect on demand for such types of goods.
vii. Expectation: If a consumer expects that in the near future, the price of the goods rises, then at the present time he demands greater quantities of the goods so that in the future he should not have to pay higher price and vice versa. Similarly, when a consumer hopes that in the future he will have good income, then at the present he will spend greater part of his income. As a result, his present demand for good will increase. The expectation of future shortage for a commodity also increases demand for it even at the same or higher price.
The factors causing shift in supply curve are as follows:
i. Change in price of the others goods: The supply of a particular commodity is influenced by the price of other commodities. For example, a rise in the price of rice will fall the supply of wheat. This is due to the fact that rise in the price of rice will encourage producers to produce more rice. Consequently, production of wheat will be lower, which results decrease in supply of wheat. Consequently supply curve of wheat shifts towards left and vice-versa.
ii. Change in price of the factors of production: Supply of commodity is also affected by the price of factors of production. With the rise in the price of factors in production, the cost of production also rises, which results decrease of supply and vice versa.
iii. Change in goal of the firm: If the goal of the firm is to maximize profit, less quantity of the commodity will be offered for sale at high price. On the other hand, if the goal of the firm is to maximize sales or maximize output or employment, more quantities will be offered in sale even at a lower price.
iv. Change in technology: Change in technology also affects supply of the commodity. Improvement in the technique of production reduces cost of production, which leads to increase in supply.
v. Change in government policy: Taxation and subsidy policies of the government also affect market supply of the commodity. Increase in taxation tends to reduce the supply, while subsides tends to induce greater supply of the commodity.
vi. Expected future price: If the producer expects the price of the commodity to rise in the near future, current supply of the commodity decreases. On the other hand, if he expects fall in the price, current supply increases.
vii. Change in number of firms: Market supply of a commodity also depends upon number of firms in the market. Increase in the number of firms implies increase in market supply. Decrease in the number of firms implies decrease in market supply of a commodity.
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